💼 Gross Margin

Gross Margin#

Revenue minus cost of goods sold, expressed as an amount or a percentage.

Important

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What it is#

Gross margin is the share of revenue left after subtracting the cost of goods sold (COGS) — the direct cost of producing and delivering the product. It measures the efficiency of core operations, before overhead, sales, marketing or admin. It answers: for every $1 of sales, how much is kept after paying to make the product?

Formula#

\[\text{Gross Margin} = \frac{\text{Revenue} - \text{COGS}}{\text{Revenue}} \times 100\%,\]

where COGS is the direct cost of the product or service — materials, production labour, and for SaaS, hosting and infrastructure fees.

Worked example#

With revenue $1,000,000 and COGS $400,000,

\[\text{Gross Margin} = \frac{1{,}000{,}000 - 400{,}000}{1{,}000{,}000} \times 100\% = 60\%,\]

i.e. the company keeps 60 cents of every sales dollar after production costs.

Interpretation#

High margin — strong pricing power and efficient delivery; software is often 70–90%.
Low margin — heavy production or operational cost; retail and manufacturing run 20–40%.

Gross vs net margin#

Gross margin subtracts COGS only; net margin subtracts all expenses (sales, marketing, R&D, admin, interest, tax). Gross margin speaks to core operations, net margin to overall profitability.

Why it anchors unit economics#

Gross margin is the bridge from revenue to profit in customer metrics: Net (Contribution) LTV = Gross LTV × Gross Margin, so it is what turns a top-line LTV into the profit number you actually compare against CAC.

Theme: Business & Growth Analytics · All terminology

Hint

Mind map — connected ideas

Net LTV (sometimes called Contribution LTV) · Gross LTV (Customer Lifetime Value) · LTV:CAC Ratio · Valuation Metric · SaaS (Software as a Service)

Hint

More in Business & Growth Analytics

Blended CAC (Customer Acquisition Cost) · CAC (Customer Acquisition Cost) · Cannibalization · Channel-Specific CAC (Customer Acquisition Cost) · Churn · Cohort · Cohort-Based LTV (Simple Version) · Conversion Rate (CR) · Cost-Per-Click (CPC) Models · Cross-Selling · CTR (Click-Through Rate) · Customer Lifetime · Customer Segmentation · D2C (Direct-to-Consumer)